China and India: Idiosyncratic Paths to High Growth

Author(s): KAUSHIK BASU

Source: Economic and Political Weekly, Vol. 44, No. 38 (SEPTEMBER 19-25, 2009), pp. 43-49,
52-56
Published by: Economic and Political Weekly
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 I special ARTiri r MMMM?1 = - =-?--- -z^^f? = - - =- "

China and India: Idiosyncratic Paths to High

KAUSHIK BASU

If the Chinese economy had failed, mainstream Do a counterfactual experiment. Assume that China has
economics would have described this as completely the political and institutional system and the structure of
governance that it actually has, but that its economic
predictable, given the extent and nature of involvement
record happens to be dismal. Suppose it has a growth rate that
of the Chinese state in the functioning of markets and averages 2% or 3% per annum, every now and then its economy
the economy. The fact that China has succeeded falters and actually shrinks, its unemployment is large, and its

therefore should lead us to question our textbook headcount ratio of poverty is high and unchanging. Most analysts
and "experts" would say that this is exactly what is to be expected;
doctrines of development. Much of this paper is
that with its big and intrusive government, the exercise of "party
presented as a comparative study of India, China and, power" over commerce and economics, and the use of controls to
briefly, other Asian nations. It is shown that the regulate the movement of labour, it is not surprising that China's
economy is doing so badly.
mainsprings of development in these nations are widely
Despite major moves to liberalise the economy since 1978,
different, even though their trajectories of growth are China remains one of the most state-owned economies of the
converging. The paper argues that social and political world. Its political and institutional setting is much more socialis
priming plays a major role in determining which tic than, for instance, India's. If with that setting intact, its eco

economic policies will work. In the case of China, whilenomy had failed, it would not be unreasonable to expect that
economists would uphold China's experience as a textbook
the liberalisation from 1978 onwards was important, the
demonstration of what that kind of polity does to the economy.
social preconditioning achieved during the high-noon Hence,
of the fact that China's economy has succeeded poses a
the Maoist period, up to 1978, was no less significant. In major intellectual challenge to mainstream economics. Thus far,
judging the sustainability of growth in Asia it is essential the principle way in which mainstream economics has met this
challenge is by distorting the facts to fit the model, instead of the
to keep these social and political factors in mind.
other way around.
If one turned to India's experience, certainly up to the end of
the 1980s, it would appear the opposite. The bulk of India's pro
duction has been in private hands. In terms of the share of gross
domestic product (gdp) emanating from the private sector India
looks rather similar to South Korea. The history of entrepreneur
ship in India goes back easily a couple of centuries (see, for
instance, Tata 2007). India has had a thriving and deep market
for stocks and shares and in large parts of the nation the hand of
government has been weak if not non-existent. In fact, some
parts of India are among the most "marketised" economies of the
world. You can buy virtually anything, from college degrees,
through driving licences to medical certificates for good health.1
In many of these areas there are bandits but no enforcers of the
law. Since these are some of the poorest areas of India, it is
evident that when we argue for freer markets and more open
A first sketch of this paper was developed at the invitation of Gary
Becker for presentation at a conference in Tokyo in September 2008.1 trade we must not confuse these with the lack of government.
am grateful to him for this opportunity. I would also like to thank Alaka Both these conclusions -- for China and India - would be wrong.
Basu, Jayant Vivek Ganguli, Tom Lyons, and Henry Wan for reading Our penchant for these erroneous conclusions demonstrates,
through subsequent drafts of the paper and providing many useful
more than anything else, how straitjackets are undesirable when
criticisms and suggestions, to Brian Dillon for research assistance, and
it comes to the study of the economy; and that to do economic
to Sherm Cochran for directing me to some relevant references.
analysis in terms of the size of government (big government is
Kaushik Basu (kb40@cornell.edu) is with the Department of Economics,
bad or big government is good) or in terms of markets versus the
Cornell University, Ithaca, New York.
state is simplistic to the point of being flawed. Markets, trade and

Economic & Political weekly BBSS September 19, 2009 vol xliv no 38 43

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 SPECIAL ARTICLE- _^__v" ~= ^ ^ ^- yi=i^~y=-'-- ;:;r- ' ...
incentives are critically important for an economy
offtothe
prosper
mark. Somebut50 years ago, the Philippines was the nation
so are social norms, institutions and the state. to bet on in Asia. But somewhere along the way it stumbled and
has now fallen behind the pack. Given the dismal record of the
1 Introduction Soviet Union, many would have predicted that China, also trying
This paper studies the dramatic developments in the Asian
to grow undertheatre
a command economy, would fail, and they would
turn
over the last few decades. Over centuries this was a out to be wrong.
region that In the 1950s South Korea and India were
slumbered. First, it was Japan that woke up; by
boththe lateand
abysmally 1960s
comparably poor. In 1956, the us government
Singapore, Korea, Taiwan and Hong Kong were growing
stopped calling itsat a
financial support of Korea "development as
rapid clip; by the 1980s Asia began to truly change when
sistance" Chinait "supporting assistance", to clarify that
and renamed
the aim was
began growing consistently at rates till then believed to to
beprovide
quite basic consumption support since develop
impossible for a nation as large as China. Then, byment
thedid not seem to be on the cards (Clifford 1994). What is
mid-1990s,
amazing rate
India, for long wedded to a mediocre 3% gdp growth is that- this
theopinion was held barely a decade before
famous "Hindu rate of growth" - suddenly broke ranks
Korea took off andfrom
became a story of huge economic success and
left Latin
many other developing nations in Africa, Asia and the Indian economy behind by a wide margin. Development
America
and also its own past and began surging ahead.forecasting
Over the five
is clearly hazardous business.
years, 2003-08, India's gdp growth rate has averaged just short of
9% per annum. Fifteen years ago if someone had predicted this
Economic Growth: Core Factors
for the Indian economy the person would have With
been all laughed out
these provisos in place, let me point to some findings that
of court.2 will form the core of this paper. It will be argued that we have too
Now, with even the laggards of Asia joining in on the high often ignored the social and institutional factors that lie behind
growth bandwagon, it does appear that Asia is ready to claim the economic growth. Take the case of China. Its growth rate did
21st century as its own. It could become the engine of growth for show a marked improvement, especially in terms of steadiness,
not just its own region but for the world. But how did we get here from the early 1980s. This happened soon after Deng Xiaoping's
and how sustainable is Asia's growth? Those are the questions economic liberalisation of the late 1970s and most analysts link
with which this paper is concerned. the two causally. They are in all likelihood right that it is the pro
It is tempting, especially for academics in search of glory, to try market liberalisation3 that set China off on its searing growth
to explain all these nations' take-offs in terms of one overarching path. But what is usually not recognised but is probably equally
cause (like a theory of gravity to explain not only why apples fall true is that the three decades of Maoist communism preceding
when suspended in mid air but also oranges, stones and shoes), Deng's liberalisation played a critical role in the social priming
to find one pattern that explains it all. But our intellectual history that contributed to the subsequent economic growth.4
is littered with grand theories of how society progresses and how China's labour force is one of the most disciplined and also ac
our past can be described in easy patterns that have, ultimately, quiescent, and its civil society lines up behind the government in
been proved wrong. It will be argued here that to understand ways that is true of few other societies, developed or developing.
economic development and design effective policy we must resist Thanks to the history of iron control from 1949 to 1978, China's
the lure of grand overarching explanations. Even if such explana labour force is relatively easy to manage and control, and stands
tions are in principle possible, the social sciences are, as yet, far in sharp contrast to India's chaotic and demanding organised
from discovering them. labour. During the Maoist communist period ^China's workers
To understand development and why some societies take off were brought into trade union membership in large numbers and
and others do not and why, from among a host of nations caught the trade unions were subsequently brought under firm gov
in a poverty trap, one suddenly breaks rank we must be prepared ernment control. There were periods of wage repression and
to look at the idiosyncrasies of each society, to search in the nooks strikes and work stoppages were simply not allowed. India in
and crannies of a nation's economic, social and institutional contrast has a small unionised labour force but the unions are
structure. We may be lucky to ultimately stumble on one expla powerful, can and do stop work and the government is often an
nation that fits all, but even if we do not, research of the kind swerable to them.

suggested above can yield valuable insights into policy and what
a nation should do. This implies that, in crafting effective policies
for development, we must not be wedded to simple rules of what
constitutes correct policy but be prepared to make allowances for
the institutional specificities of the nation in question and to im
provise intelligently.
We have to also be prepared for the possibility that widely
accepted wisdoms will get turned on their heads, since econom
ics is still a science in its nascency. About a 100 years ago, Argen
tina and the United States (us) seemed like two economies more
or less on par and many would have predicted that Argentina
would be the one to get to the fore. This turned out to be widely
When a new policy initiative is undertaken by the state in
China, civil society usually goes along with it and the protests are
in the fringes and few. This is very different compared to what
happens in, for instance, Ae us, much of continental Europe and
India, where government has to spend a lot of time and capital in
persuading the population of its policy shifts before the moves
are possible. It is very likely that it is the history of oppressive
communism that has created these conditions in China and it is
the lack of such history that makes policy management such a
hard task in India. Hence, China owes its growth to the economic
policies of 1978 onwards but also to the social and political prim
ing that occurred under Maoist communism before that.

44 September 19, 2009 vol xliv no 38 QGE3 Economic & Political weekly

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 Digressing momentarily, it is interesting to ponder why doctri population nowadays. Basic data for a spread of Asian nations are
naire societies, that is, ones that derive their view of the world provided in Table 1. For a detailed comparison of the eight nations
and plan of action from some book, whether it be a party mani of south Asia, see Basu and Maertens (2008).
festo or a book of religion, often do well for extended stretches of From the column in Table 1 giving per capita income, it is interest
time. The reason why this is a puzzle is that such books usually ing to see that India, which used to be behind Pakistan and vastly
offer wisdom that is flawed, if for no other reason because scien behind Indonesia, is now ahead of Pakistan and rapidly closing
tific knowledge moves on whereas ideological or theological the gap with Indonesia in purchasing power parity-corrected per
knowledge remains obstinately rooted to some atrophying view capita income. On the other hand, Korea and India which in the
point even when new evidence and new reasoning makes it obso 1950s looked pretty similar are so different today that they
lete. I believe that the one advantage that an ideological society have, coincidentally, the same national income, even though
has is its ability to solve important coordination problems. Con India's population is 22 times that of Korea's (see Krueger 1998;
sider a society where citizens want to cooperate and are in broad Panagariya 2008). The growth rate figures in this table are a bit
agreement about which way they want society in the aggregate misleading, since there are yearly fluctuations and it is best to
to go. Despite this broad consensus this society could easily be look at growth rates averaged over a few years. Doing so will
come dysfunctional because different individuals could be pursu make it clear that, Singapore, which had a record that was by some
ing slightly different social objectives and failing to cooperate measures the best in Asia, ahead even of Japan, has now slowed
with others who do not share the exact same objectives. Having a down, as is natural for a very rich nation. India, as mentioned
manifesto or a book of religion that prescribes certain actions has earlier, has been growing fast over the last 15 years and very fast
the advantage that, even if the actions are flawed scientifically, over the last five. Its growth rates in 2005, 2006, 2007 and the
they manage to achieve a certain societal coordination simply by first half of 2008 were, respectively, 8.7%, 9.1%, 8.4% and 9%.b
virtue of everybody following the same text. It plays the same The table also shows how the Philippines has slid rank, and that
role that a conductor's baton does for an orchestra. Indonesia never really fully recovered from the east Asian crisis
Returning to the paper's theme, one reason why India cannot of 1997-98, since political problems erupted with the crisis and
just follow the Chinese example and expect to prosper is that stifled the country's economic performance. This is in sharp con
India does not have the social preconditioning for the same trast to the other east Asian nations that were caught in the crisis
policies to work. This may be one reason why some parts of India, and, in fact, used it to restructure their economies (Aziz 2007).
such as West Bengal in recent times, that tried to replicate "com
Table!: State of the Economy (2007)__ _ _ ____ _
mandeered industrialisation", as happened in China, did not fare Population GNI GNI GNI GNI Population
(Million) (Billion $) Per Capita ($) Per Capita Growth Rate Growth Rate
so well. Moreover, India won her independence not through war
_ PPP($) 2006-07 (%)_ 1990-2007 (%)
or revolution but non-cooperation, street protests and the quiet
China _ 1,320 3,293 _ 2,360 5,370 11.6 0.9
subversion of the economy. There should be no surprise that the India 1,123 1,166 950 2,740 97 1.7
civil society of India, having ushered out the then most powerful Indonesia 226 416 1,650 3,580 6.6 1.4
nation in the world by these techniques, has now acquired an Korea, Rep 49 971 19,690 _ 24,750 5.4 ()./
unrivalled mastery of them. The Indian government and corpo Pakistan 162 146 870 2,570 6.8 2.4
rations have to simply learn to deal with the great skill that India's Philippines^ 88 158 1,620 3,730
population has for workplace subversion. India is at last manag Singapore __ 5 156 32,470 48,520 8./ 2.4
ing to grow fast because of critical changes that were effected in Thailand _64_ 238 3,400 7,880 5.9 1.0
liberalising the markets in the early 1990s but also because of Vietnam 85 70 790 2,550 8.0 1.5
Source: World Development Indicators, 2008, World Bank.
concurrent social and political changes that have been occurring
in the country. One negative change that has occurred dur
With this foreword out of the way, let me begin the formal good period and is not captured in Table i is
analysis by describing the broad features of contemporary Asian equality. This is true for all the Asian nations
economic progress, before turning to a detailed, comparative of Thailand. In China, inequality is rising and
analysis of China and India. in the us and Russia.6 Japan, once the basti
seen a steady increase in inequality (Burton
2 The Asian Theatre
Inequality in Korea has been large for much o
Asia today is home to some of the poorest nations and most of the and seems now to be growing further (Oh
fastest-growing nations in the world. Nepal, Afghanistan and intra-country inequality is probably, as I sha
Bangladesh are among the poorest nations in the world's league beyond the control of any single country. It is
table in terms of per capita gdp. India is home to the largest sation and the only way to control this is by
number of people who live on less than one dollar a day. At the that are coordinated across nations.
same time, in terms of annual growth rate of per capita gdp over
the last two decades, the fastest-growing nation in the world is Economies on the Ascent
China, followed by Vietnam and India. In terms of population What are the reasons behind the Asian econ
growth Asia's phase of rapid increase is probably in the past; the last few decades? As it turns out it is a motley
African nations are the ones putting on the fastest additions to that do not have too many common features.

Economic & Political weekly ESQ September 19, 2009 vol xliv no 38 415

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SPECIAL ARTICLE -==-"-=^ s- _ - J ^--3 1 ~-^=e_
explanations is Justin Yifu Lin's (1996)the
argument
staple ofthat
half all
thethese
world, by 96%. There w
Philippines
Asian nations began with the prevalent theories and
of the time Indonesia
- the and in Bangla
need for import substitution, the emphasis on heavy
workers industries
went on a rampage. Both China and
and the planned control of the industrial sector. Asfrom
consumers thesethe
policies
oil price rise by using
the
turned out to be failures, the nations with inflationary
shallower crisis
pockets wereended, the sub-prime
forced to make the changes earlier. The more stable
industrial and larger
recession in the us, Europe and
has on
economies,' like China and India could hold caused big
to the hardships
old policies for the export-o
longer than the less resourceful economies
mies.such as Singapore
Serious andcrisis may be, it do
though this
Korea. In the case of India it is indeed true that it was
run prospects of a crisis,
China, India and the other
arguably the biggest faced by independent India, that triggered the
3 but
policy changes that were long on the anvil China and India: What
no government, for Were the Trig
reasons of politics and group interest, actual
But fororthe
illusory, hadChina
fact that the has had sustained
would
courage to undertake. The first Gulf War have brought
1990-91 convinced us that China cannot
India
growth. Before
precipitously close to defaulting on its international debt China,
commitcommunist regim
ments and became the peg on which major changes
growth wereand
spurts initiated.
done well as sprinters, bu
The social and political situation matters more
lasting than
growth. is ac
This is true of the ussr, No
other
knowledged by economists. India is moving nations.
into Breaking
a strategic posi that trend, Chin
growth for three
tion globally, whereby it is viewed as a counterpoint decades.
to a face-off
between China and the us, and in the Asia-Pacific
There can beregion it has
no denial that this goes again
wisdom
emerged as one of the key players, along of textbook
with China, economics.8 Despite
Japan and
the us (Pant 2007). This has helped thereforms
Indian economy, as which
of 1978-80, has were significant
the fact that India and the us have shared concernscontrol
draconian about the
of rise
the Chinese state prev
China
of terrorism. Likewise, India's democracy, the
while of"socialist planning
great value in system still o
responsibility
itself, may also have played a role in slowing down the system determines where a pe
nation's
and argue
trajectory of development. I shall however wherelater
it cannot,
that it ...
is all land is owned a
India's democracy that is likely to give itsState," and the
high recent Chinese
growth sus Communist Party
tainability in the long run. senior appointments in firms and "even if t
member,
Some detailed analysis of south Asian there that
data suggests will the
be a party member (or
whole of south Asia, excluding India, is ostensibly junior(s)
growing faster than inthe
the organisation who
'ideological'
rest of the world and so there is hope that grounds,
Asia's laggards ...in China banks are
will also
but
now join in the boom. There may indeed be instruments
merit in Martinof the State... ." These quot
Wolf's
(2006), who
prediction in the Financial Times of 23 February in his
2005, comparison
where he of India and C
is talking about Asia and mainly about China and
stressed India: "The of free-market poli
the importance
Forthe
economic rise of Asia's giants is, therefore, most analysts,
most using standard model
important
plaining
story of our age. It heralds the end, in the not too China's
distant aperformance
future, is a hard task
na's by
of as much as five centuries of domination development one has
the Europeans and to think out of the
their colonial offshoots."7 This will have momentous
analyses conse
of China's success is that by Lin,
quences for the world. There is a lot of also Lin 1998).
hyperbole on They demonstrate that thinki
the subject
and some wild-eyed patriotism. But what does dispassionate
categories, such as socialism and capitalism o
ernments,
analysis yield? I shall in the next sections and trying
analyse mainly howto
welink these to growth
approach
got here. This, of course, has implications thethe
for what problem.
future Markets
is and incentiv
for development
likely to look like. I will make some comments to occur,
on the latter but and, as long as th
my focus in the remaining pages is on theintelligence
triggers of to weave
Asian these into the policy f
growth
forwill
and, in discussing these,, the special focus economic
be on take-off. Further the Chinese
the case of
China and India. vened in macroeconomic markets by keepi
It should be mentioned, if only to put capital and
it aside, has
that inkept
the imits exchange rate delib
mediate run the next two or three years in- order to break for
the prospects intoAsia
global markets with i
(2008) caused,
do not look good, thanks to the global crisis, rightlyinitially,
points out,
by these are not stra
ing
the rise in crude oil and food prices and, by other
after countries.
this subsided, by Nevertheless, thei
somewhat
the sub-prime crisis which led to a recession in theof a puzzle and may have somethi
industrialised
world and spilled over to the emerging economies.
tion's history.10Crude oil
prices rose by 35% over the previous to last year, causing slow
downs in the us economy and Europe, with Centralised Doggedness
huge fallouts for the
In addition, I believe that the 30 years of d
rest of the world. Global food prices also rose over the last three
years. During one year before the last from 1949
one the to 1978,
average instilled
price of a docility in th
which has played an important
food had risen by 56%, with wheat price rising by 92% and rice, role.11 This

46 September 19, 2009 vol xliv no 38 Econom

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been of no use if the government was corrupt or unintelligent. aggressive family planning by a dictatorial government during
But the Chinese government was none of those. Deng Xiaoping 1975-77 resulted not in family planning but in the government
was one of the most intelligent leaders, who understood the vital being overthrown.
role of incentives for households, farms and manufacturers. There is evidence of some of the same centralised doggedness
Though he was unwilling to give up the state's huge control, he in China's entry into Africa. The foreign direct investment and
realised the need to allow agents to take their own profit-maxim aid that China is pouring into Africa, seems to have a clear eco
ising decisions freely. In addition, by the 1980s, China's by-then nomic rationale. The bulk of the money is going where returns
amenable labour force made it easy for government to usher in are likely to be higher (Biggeri and Sannlippo 2008) and there is
policy changes with an ease that would be inconceivable in a sovereign rationale to this that is not always there when a mul
democratic countries. titude of corporations from an industrial capitalist nation goes
It is not being argued that these are innate qualities. As will be into the developing world.
argued presently, beneath the surface, there is enough evidence
of individuality and rebelliousness in China. It will be claimed The Quiet Dissent
that therein lies the main risk for the economy. If China's future It is a contention of this paper that this control over civil society
leaders do not have the astuteness to allow these forces to vent, which has helped China prosper is also its greatest risk. If the
the forces can push the political leaders into a corner and give kinds of control mentioned above occurred because individuality
rise to fractiousness and policy perversions. was actually absent in society, then there may be little risk from
One standard predicament of highly-centralised, one-party this. But there is enough evidence that that is not the case. I am
governments is that they eventually get into a situation where not just thinking of the occasional protests, such as the Tianan
the leaders are no longer wanted by the people and yet they have men Square uprising,13 but also the remarkable flowering of indi
no easy exit. If they relinquish power they are likely to be perse vidual talent and creativity that one sees in China today. The
cuted and punished. So it is not so much the love of power as the most remarkable evidence of this is in contemporary art. The
fear of what lies on the other side that makes them cling on to originality and creative audacity of Chinese artists is quite breath
their posts. Once this happens, policies are guided no longer by taking. The level of experimentation that one finds in the works
national development interests but narrow survival instincts; of artists like Wang Guangyi, Fang Lijun, Zhang Xiaogang, Yue
and growth begins to falter and political power is lost, but only in Minjun, Zhong Biao and several others may well be comparable
its wake. to the revolutionary art movements one saw in Europe in the 19th
The kind of social engineering that contemporary China at and early 20th centuries. These are indicators of what is happen
tempts is quite unthinkable in most nations. On 7 February 2008, ing beneath the surface calm of an organised and pliant society.
Xinhua, China's official news agency announced that the civic Though the world of art and humanistic talents appears distant
index of Beijingers was 73.38 in 2007, up from 65.21, the per from the world of commerce and economics, one can read off in
centage of Beijingers who spat on roadside was 2.53% in 2007 dicators of what is to come in the future by looking into the state
down from 4.90% in 2006. No matter how these indices are of these individual pursuits.
constructed it was interesting to see heightened interest in these There is also evidence from ethnographic research that poli
as the Olympics approached. And to spur on improvement in civic cies which appear to run seamlessly on the surface are often met
matters like the above, the government launched initiatives like with quiet dissent. There is, for instance, evidence that the harsh
"queuing day", which required that on the 11th of every month population policies are frequently subverted by ordinary citizens,
government officials would go out all over the city to tell citizens at times even with the consent of officials (Greenhalgh 1994).
"it is civilised to queue, glorious to be polite". Then there was the The famous experiment of farmers in Anhui province in 1978 to
"seat giving day" once a month when the young and fit were secretly experiment with contract farming was an act of subver
encouraged to give up their seats in buses and trains to the old sion. In that case, the subversion became a harbinger of desirable
and less abled (Gardner 2008). Clearly, the state in China feels change, but that need not always be the case. Unless these sub
able to influence what in most societies is left to parents and terranean, forces are allowed to come to the surface naturally,
guardians to struggle with (usually without success) within the they can become unmanageable and disruptive.
confines of their household.
One sees evidence of centralised control and submission of the China's Growth: A Puzzle
citizenry in China's population policy. The original view was that Let me turn back from speculations about the future to under
socialism can cater to a population of any size and, in addition, standing how we came to be where we are. The best way to get an
Mao Tse Tung believed that a larger population would lead to understanding of a nation's performance is to look at its growth
greater strength and so the citizens were encouraged to have chart and keep in mind the major events - economic, political
large families. Anybody who proposed family planning was im and social, that underlie the growth numbers. I have therefore
mediately silenced.12 By the 1970s China fertility was extremely provided in Table 2 and Figure 1 (p 48) the basic data and graph on
high. But by the late 1970s the government changed its mind on China's growth. Just eyeballing these can be instructive. Under
population and initiated draconian measures to control the popu lying this remarkable growth performance is an investment and
lation. By the 1990s the one-child policy had become the norm. savings rate (Figure 2, p 49), which as its percentage of gdp is
All this stands in sharp contrast to India where an effort to have unrivalled in the world. The east Asian super-performers, such as

Economic & Political weekly DDES September 19, 2009 vol xliv no 38 47

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 SPECIAL ARTICLE : ^ ;'
South Korea, Hong Kong (before 1997), Singapore andFigure
Taiwan,
1: China's Growth
Annual growth in GOP (%) for China (1960-2007)
have all been high savers, investing and saving over 30% of their
national income, though none of these nations reached the height
China reached.14 Standard growth theory prompts us to expect
that high investors will have high growth and China fits this
model well (see Prasad 2008a, for discussion on this). But this is
where the help that one get from textbooks in understanding
China ends.
lLoj 1 1970 1980 1990 2000
Table 2: China's Progress
GDP Growth Gross Domestic Population Fxportof GDP Population
(Annual %) Savings Growth Good/Services (Billion 2000$) (Millions)
(%GDP) (Annual %) (%GDP)

:f
1960 .. _.. 1.83 .. 70.35 667.1
1961 -27.10 .. -1.02 51.28 660.3
1962 -6.11 _ .. 0.82 48.15 665.8
1963 10.34 .. _ 2.46 .. 53.13 682.3 30 :

1964 __ 15.84 _ .. _ 2.32 .. 61.55 698.4_

1965 _ _ 16.36 .. 2.38_.. _ 71.62 715.2 What the data and the graphs reveal is that the main differ
1966 10.70 .. _ 2.79 .. 79.28 735.4
ence in the periods before 1978 and after is, interestingly, not so
1967 -5.70 ? 2.57 _ .. 74.76 _ 754.6
much in the average growth rate, as in the volatility. It is virtually
1968 -4.10 .. _ 2.61 .. 71.70 774.5
become an axiom that China took-off in 1978 and this was caused
1969 16.90 2.74 _ 83.81 796.0
1970 19.40 28.93 _ 2.76 2.61 100.07 818.3 by the market reforms, in his fascinating book on the rise of mod

1971 _ 7.00_ 29.29_ 275 276 107.08 841.1

ern China and its implications for global politics and world peace,
1972 _ 3.80_ 27.16 2.46 3.18 111.15 862.0 Kang (2008: 3) writes, without further need to justify, "China has
1973 _ 7.90_ 29.99_ _2.28 4.33 119.93 _ 881.9rapidly emerged as a major regional power, averaging over 9%
1974 2.30_ 2873 2.07 4.98 122.69 900.4 economic growth since the introduction of its market reforms in
1975 _ 8.70_30.19_1.77_4.59_ 133.36_ 916.4
1978". What I am arguing in this paper is that, even with the
1976 -1.60 _ 28.27 _1.55 4.81 131.23 930.7
market reforms, the Chinese economy continues to be vastly
1977 _ 7.60_28^87_1.36 _ 4.69 141.20 943.5
more state-controlled than any industrialised nation and any
1978 1170 37.55_ _ 1.34 6.64 15772 956.2rapidly growing developing country. It is, therefore, a puzzle that
1979 _ 7.60 _ 35.70 1.33 8.57 16970 969.0
China has grown so fast for such a long period; there are no
1980 _ 7.80 35.04 1.25 10.71 182.94 981.7
parallels in history.
1981_5.20 _ 34.04 1.28 12.65 192.45 993.9
Second, the so-called big break in 1978 is not as sharp as is
1982 _9.10_ 35.85 1.47 _ 1232 209.97 1,008.6
|983_ 10.90 35.35 1.44 10.91 232.85 1,023.3popularly made out to be, in order to ensure that textbooks of
2984_ 15.20 35.02 1.31 11.34_ 268.25 1,036.8economics do not come out poorly. The average growth has been
1985 _ 13.50 34.44 1-36__ 1000 304.46 1,051.0faster after 1978 but there were periods of rapid growth before
1986 8.80 35.76 1.49 11.82 331.26 1,066.8 that. What is true is that the downward plunges that the Chinese
1987 11.60 37.27 1.60 _ 16.36 369.68 1,084.0 economy experienced every few years, up to 1978, did not hap
1988 11.30 36.80 1.61 17.05 411.45 1,101.6 pen after that time. In the pre-1978 period the highs and lows of
1989 _ 4.10 _ 36.43 1.53 _ 16.70 428.32 1,118 / growth rates that China achieved would be unthinkable in many
1990 3.80 _ 39.88 _ 1.47 19.17 444.60 1,135.2
other nations. In 1961 China's income collapsed by 27% but in
1991 9.20 40.00 1.36 20.95_ 485.50 1,150.8
1969 and 1970 its income grew by 17% and 19%, respectively. In
1992 _ 14.20 _ 39.64 1.23 22.53 _ 554.45 1,165.0
recent times, these kinds of extremes from one year to another
1993 _ _14.00_42.41_J.15_2330 632.07 1,178.4
2994_13.10 _ 44.02_1.13_ 24.57 714.87* 1J9JL8one sees in only a few Asian countries. We see it, for instance, in
1995 _10.90 i4-1l_ 1 09 23 07 792.79 1,204.9
Afghanistan, which is war ravaged and strife-torn.
1996 __ 10.00_42.49 _ 1.05 20.05_ 872.07 _ 1,217.6 China's income collapse of 1961 was caused by the disastrous
1997 9.30 _42.44_ _ 1.02. __ 2175 953.17 1220AGreat Leap Forward policy and it must be recalled that 1959-62
1998 _ 7.80_ _ 41.40 0.96 20.35 1,027.52 1,241.9
was also the time of China's big famine when anywhere between
1999 7.60 _ 39.57 0.95 20.40 1J05.61 _ 1,2537 15 and 30 million people died. But China's phenomenal growth in
2000 8.40_ 37.53 0.71 23.33 1,198.48 1,262.6
1969 and 1970 is difficult to explain; it does not fit easily into the
2001 8.30 38.39 0.73 22.60 U97.95_ 1,271.9
theory that it was liberalisation a la Deng that boosted growth. In
2002 9.10 40.44 0.67 25.13 1,416.0/ 1,280.4
1969 the Cultural Revolution had officially ended this happened
2003 10.00 43.40 _ 0.62 _ 29.56 1,557.67 1,288.4
in April of that year - but some of the most oppressive practices
2004 10.10 45.81 0.60 33.95 1,715.00 1,296.2
continued. In fact, state coercion and oppression was spread to
2005 _ 10.40_ _49.42 0.64 37.30 1,893.36 1,304.5
2006_ _ 11.60 52.26 0.56 39.94 2,112.99the1,311.8
rural areas in the 1970s where "peasants were required to
2007 _11.90 .. 0.62 2,364.44 1,320.0 abandon all sideline occupations such as raising pigs, chickens
Source: World Develop/vent Indicators 2008, World Bank. and ducks in order to cut out the tail of capitalism" (Fairbank and

4& sf.ptkmbkr 19, ?009 vol. x 1.1 v no 38 EEE3 Economic & Political weekly

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 ; \ . - : ; ., _ I SPECIAL ARTICLE
Figure 2: China's Savings during the Asian crisis of 1997-99, but growth has n
Gross Domestic Savings (% of GDP) in China (1970-2006)
back since then.15
The major reforms were in the international secto
fiscal sector and, not surprisingly, the biggest impact h
those sectors. India used to have a foreign exchange
around $5 billion. It was approximately that in 197
approximately that in 1992. Since then it has been a s
exponential rise and last year it breached the $300 billi
The haemorrhaging fiscal deficit was also much more u
trol, especially since there is a fiscal responsibility law
pels government to cut revenue deficit (Chidambaram
With the growth spurt that occurred over the last fi
and the rise of the Indian corporations as global inv
20 4.-. .-. this India's rise has been more striking than that of Chin
1960 19/0 1980 1990 2000
medium to long-run prospects look very good. In add
Goldman 2006: 398). Yet despite the clampdowndevelopment
on private en
of the last five or six years that augurs well
terprise, the aggregate Chinese economy continued to China,
India and surge and especially the former, is the growth
ahead. The science of economic development is andclearly
the a more
flow of foreign direct investment between the
complex discipline than is made out to be. tries. The two nations, despite an ancient history of in
China did badly in the mid-1970s but that was aexchange
bad time and
for collaboration (see Sen 2004, for discuss
very being
the whole world, with the old exchange rate regimes little aban
economic interaction over the last severa
Facilitated
doned for a new uncertain world and oil prices registering by China's joining the World Trade Organisat
a sharp
rise. After China's reforms of the late 1970s therein 2001,
was this has been changing dramatically in recen
no looking
Trade between
back for the country. In fact, when the Latin American crisis of the two nations has been rising at clo
per annum
1982, caused by the huge international debt build-up, and it is possible that China will replace
came, that
India's
had no effect on China, which was by then on a fairly largest
steady 10%trading partner over the next three y
per annum growth path. should help iron out some of the relatively minor conten
exist between the two countries concerning some stretc
Market Liberalisation in India boundary between the two nations. In general, the gro
nomic
India's growth pattern as well as the genesis of its high links between the two nations can be a major s
growth
factor for
since 1994 has been very different from that of China's. Someall
ofof Asia and can promote even greater
the conundrums of why growth occurred when itdevelopment in ooth nations.
did remain and
Despite
easy explanations do quite badly. India's most important these favourable developments, there are m
growth
spurt occurred from 1994 onwards, immediately following
reforms thatthe
need to be implemented in India. The labour
to be
market-oriented reforms of 1991-93 initiated by the amended
then allowing for easier hiring and firing of
finance
minister (and current prime minister), Manmohan Singh.this
believe Before
will help workers by causing wages to rise a
ing regressive
that time a combination of interest-group lobbying, their bargaining power (Basu, Fields and Debgup
India
thinking and the politics of playing it safe by doing needs to
nothing hadinvest in better infrastructure. The bu
begun to stifle the economy. The manufacturing needs
sectorto be vir
was cut down severely and trade and investmen
tually throttled by a draconian licensing systembe(Mohan 1992),
liberalised further. But the economy is a funny thing.
as if policies
trade was hampered by a system of sky-high tariffs, quantity of the same genre work at all times in all
controls on imports, and an archaic exchange-rate controlideologues do not make for good policyma
this reason,
system, and markets in general were harmed by can see the complexity of economic management by
a labyrinthine
system of labour regulation. The first Gulf WarIndia's record.
brought IndiaI described the reforms if 1991-93 as
close to a default on its international debts. In important
mid-1991 India
policy changes of post-independence India
growth
had enough foreign exchange for only 13 days of normal spurt of 1993 was not the first. The first break
imports.
This allowed the government to usher in much the
needed market
3% or so Hindu rate of growth occurred in the mid
have
liberalisations. The licensing system was revoked tried to argue elsewhere (Basu and Maertens 2
altogether,
tariffs were brought down sharply over the next thisthree
was caused
years by the rise in the savings and invest
(there is still some distance to go on this, I believe) and the
that occurred in the early 1970s. But why did savings ris
exchange rate was no longer controlled. The labour laws
the same andI have argued that this was, in turn, caus
paper
regulations were however untouched and they remain unof banks by Indira Gandhi in 1969. Foll
nationalisation
nationalisation
touched even now. I will have more to say on this shortly. Theshe directed the state-owned banks t
effects of the reforms were almost immediate.branches
The crisis was
in remote areas of the nation, where profit-driv
over by mid-1992. From 1994 the economy grewbanks had refused
at around 7% to go earlier. Data show a sharp r
per annum for three consecutive years, slowed down of
number a little
bank branches in India through the 1970s.

Economic & Political weekly E3XQI September 19, 2009 vol xliv no 38 49

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 Something similar is true for India's celebrated information promise by utilising the boost received from the closing of
technology sector. As one of the great entrepreneurs of informa economy in 1977 (Murthy 2007).
tion technology, Narayana Murthy (2000), has recorded, the
initial boost to this sector came from the government showing Savings and Investment Rate
ibm the door in 1977. This compelled the indigenous computing One common feature of both China's and India's growth ex
sector to flourish. The later market liberalisation of 1991-93 was ence is the salience of the savings rate and the investment
equally important. Without that freeing up India would never As remarked earlier, this is also true for the other Asian nat
have been able to capitalise and make good on its software The rise of these rates seems to be a precondition for sustai

Table 3: India's Progress

high growth. For China this was taken for granted for long. C
GDP Growth Gross Domestic Population Export of GDP Population has always had a fairly high savings rate, but as Table 2
(Annual %) Savings Growth Good/Services (Billion 2000 $) (Millions)
Figure 2 show, the rate never dropped below 30% from 197
_ _(%GDP|_i^ii^L_(%GDP) _
19^? 1239 J-85_4r>7__ 78.65 434.8 wards and, as we know, China's growth rate showed partic
196J_ _ 3 87 _i?-?7___ 2J19 _ 437 _ _81^9_444robustness
5 from 1978. For India the connection between sav
1962 3.13 13.74 2.25 _ 4.26 84.25 454.6 and growth has not been as obvious. As Table 3 and Figur
1963 _ 6.28 14.12 2.29 _438__ and
8954 465J
4 (p 53) show, and this is a matter on which economists
1964 7.44 13.61 2.32 3.87 96.19 476.1
commented, the sharp rise in savings in the early 1970s did
1965 _ -2.41 _14.20 _2-34___ _ 335_ 93 88_i8Z3
immediately translate into growth. I believe that there were s
1966_-0.04 _ J3.81_234 _ 4.19 infrastructural
93.84_498.9 bottlenecks that held back the economy. An
1967 _783__13.07 _234__4i05___J^1J9_510l7
any case, by the late 1970s and certainly the early 1980s it
1968_J-?7_ J325 _2JL3i _ J-?9 104.61_ 522.8
evident that the economy was growing faster.
1969 _? 6 54 1479_ 2j32_376_111 .45 535.1
Interestingly, India has witnessed another very sharp rise in
1970_5.15_15.49_ 2.31 _ 3.83_117/19_547.6
savings rate over the last four years. The rate climbed up f
1971_1.63 __ 16.37 _ 2.29 __ 3.7^_ 119.10 5603
24% to 34%
1972_-0.55_ J6.29_ _ _2.27 _4_.08_J18.45 -- according to the latest Economic Survey, the sav
_ 573.1
1973_ 3.32_15.96 __2-26 4.26 122.38_ 586.2_
rate is 37.7% (Government of India 2009). For the first time
' 1974_ 1.18 16.93 2.26 4.89 I2_3-83_ 599.6
is saving and investing at rates which have been associated
1975 _ 9.15 17.78 _ 2^28 5.71 _ the
135.16 613.5
Asian tigers. This is so recent that this has not yet been
1976 1.66 19.50 2.28 6.76 137.39 627.6
lysed sufficiently. But this augurs extremely well for the coun
1977__7.26_ _ 18.59_ 2.28 6.46 147.37
Since savings rates do642.1
not fluctuate as wildly as many o
1978 _571_ 20.24 _2.28_6.39_15578_656.9
economic indicators, there is reason to expect that India is n
1979_-5.24_J977_ _ _2.27_6.83_ 147.62
the over _ _672.0_
- 30% range for some time to come - maybe a deca
1980_6.74 15.41_2.25_ 6.21 157.58 687.3
two. This should help India sustain an annual growth rate o
1981_6.00_19.52_ 2.23 _6.00 167.03 702.8_
1982 3.47 19.24 _ 2.20 6.05 172.82 7184 (once the global recession is over). If, in addition, the cou
manages_to734J
1983 __ __7.30_ _ 17.45 _ 2.15 5.91 18543 implement some major reforms, like curtail
bureaucracy
1984 3.82 _ J9.89 2.10 6.36 192.52 _ 749.7^ and liberalising labour laws, a sustained gro
1985 _ 5.23_21.05_ 2.04 5.31 202.60
rate of765.1
over 10% per annum seems achievable. Unlike Ch
1986 4.77 21.18 2.16 5.25 212.26 781.9 growth, the driving force of which comes from the top and
1987 3.96 20.61 2.12 5.67 220.66 798.7 government, India's growth surge seems to be a bottom-up
1988 9.64 2220__ 2.10 _ 610 _makes,
ess. This 24193_8156
for the first time in decades, the sustainab
1989 _ 5.95_2Z57_ 2.06_ 7.10 256.32
prospect of India's _
high832.5_
growth better than that of China.
1990 _ 5.53 _ 22.74__2.02_7.13 270.49
It is arguable that_there
J349.5
is nothing more China can do to
1991 1.06_21.98_1.98_8.59 273.37_866.5
up its growth rate - it is already growing at full throttle. S
1992 5.48 _23.02_J.86__8.94_ 288.35 882.8
people argue that China's investment, especially that part w
1993 4.77 _21^24 1.85_9.95 _302J0_8993
comes from the state-owned enterprises, is extremely in
1994 6.65 23.22 _ 1.80 10-?0_ 322.20_ 9157
cient. So it is possible for China to cut down on investment
1995 _7-57 _ _2J>-4_?____1Z8_:_ 10.97 346.59_ __.932.2_
not have any affect on growth. Its big challenge is to increas
1996 7.56 _ 20.95 _1.76_ 10.51 372.78 _ 948.8
1997 4.05_ _22_.65_174_10.82_ 387.90
efficiency _965.4
of the investment undertaken by the state (Dolla
Wei 2007).
1998 _ 6.19 20.95 J .72_ J1.15 411.92 982.2
1999_ 739 24.15 1.70 11.66 _ 44235 _ 999.0
2000 __ 4.03_ 23.24 1.68 _13.23State-Owned
_ 460.18 Sectors
_ 1,015.9_
2001 5.22_23.29 _1.62_12.76India's
484.19_J.032.5_
big problem now is that its government is in the wr
2002 _377_24.24 _1.55__J4.49places.
_ 502.43__048.6_
It is not a problem of size as much as location. In term
2003 837 25.48 1.49 14.80the544.49 J,064.4
fraction of the national income that is produced by s
2004_8.28 29.82_1.43 18.07 589.56 1,079.7
owned enterprises, India is not an outlier in Asia; and comp
2005 9.24 31.71 1.37 19.89 644.02 1,094.6
to the communist and former communist nations, India is a
2006 9.69 _JJ2.98 138 22.09 706.43 _ 1,109.8
2007 9.03 35.10 1.21 21.32 770.20 1,1233 privatised economy. While the output emerging from s
Source: World Development Indicators 2008. World Bank. owned enterprises in 1990 in India was 14.1%, the figure

52 September 19, 2.009 vol xliv no 38 GEE3 Economic & Political w

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Figure 3: India's Growth use the law to impose certain terms exogenously. Th
Annual growth in GDP (%) for India (1961-2007)
10 - well-meaning but is not good for the workers' well-b
sider for instance the textile and apparel sector. Given th
demand from the fashion garment sector, especially fr
dustrialised nations, a firm may have to be prepared to
of workers when the demand is high and then downsize
demand declines. As the ceo of a leading textile export
Orientcraft, told me, he projects the demand for labou
the slack periods and keeps his labour force size down
just so as not to be burdened with an un-viably large w
This shows up in the indicators of the firing index and
19^60 I 1970 " ^80 1990 2000
taken to close down a bankrupt firm displayed in Table
all the Asian countries described in Table 4, India is a to
on both these scores. If with the other advantages that
had in recent times, it can put its bureaucratic house in
-6 J have a better system of contract enforcement, it can f
labour-intensive manufacturing sector and achieve a
Figure 4: India's Savings
Gross Domestic Savings (% of GDP) in India (1960-2007)
growth rate.
Where government is needed and inadequately av
India is in the provision of infrastructure and in the soc
sector. On infrastructure the awareness is now high in
ment and there is reason to expect large changes over
five years. On social welfare the situation is still bleak. P
still very high with around 250 million people below th
line (and India's poverty line is quite a bit below on
day).18 If the poor and the dispossessed develop some o
tity- for instance, based on caste or regional origin, then
be politically destabilising. Government needs to do m
in eradicating poverty.
^ ^/^^ The risk of political destabilisation is there also f
10 J-,-,-,-,-,-.-, (Prasad 2008a) and may be even greater than what In
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
These risks manifest themselves in different ways i
China in 1985 was an astonishing 70%. Though state-ownership
Table 4: Size of Government
has been declining, even today it is around 50% in China (Dollar
Share of State-owned Enterprises Share of State owned Enterpris
in GDP Non-agricultural Economic Activity
and Wei 2007), which is way higher than all the nations listed in
Country _ 1978 1990 1978 1990
Table 4.17 It is not just that, as Huang (2008: ix) observes, "As late
lndia_ 9.1(1980) __ 14.1 13.9(1980) 18
as 1998 much of the Chinese officialdom held private
South ownership
Korea 10.4(1980) 10.2 12.2(1980) 11.2
in utter contempt". Table 4 shows, in 1978, South Korea _
Pakistan had a
8 11.6(1988) 12.8(1980) 16
Thailand
larger share of output coming out from the state-owned __
sector _ 5.4(1988) 6.2(1988)
than India. The ranking had changed by 1990 but that gap wasMalaysia_ 17(1986) _ 21(1986)
Philippines
not large. Indonesia looks similar to India; Malaysia _ 0.9 3(1989) _ 1.3 3.9(1980)
has a dis
Indonesia_13.8
tinctly larger share of state production and the Philippines is the 13(1989)_ 19.2 17
China
most privatised economy - with a large part of that, at one time,
Singapore
in the firm private grip of Marcos.
Vietnam
While the size of government is not India's problem, the nature
Source: World Bank, Bureaucrats in Business (1995), Oxford University Press.
of its engagement especially in the industrial and services sector,
has turned out to be obstructive. This is evident Table 5: Bureaucratic
from Table Efficiency
4.
Country Starting Business Number of Days Number of Difficultyof
Moreover, where it is most needed - in enforcing contracts(Number
be of Days) to Enforce Contract Months to Close Firing Workers
Business Index
tween agents - it has been either non-existent or has encouraged
the reneging. The number of days that it takes for the govern
India _ 33 _ 1,420 120 70
ment to enforce a contract that one party to theChina_
agreement_35
is _ 406 _ 20 _ 40
Singapore 5 120 10 0
trying to renege on is 120 in Singapore, 406 in China and a hand
South Korea _ _ 17 230 18 40
some 1,420 in India. Pakistan 24 880 34 30
The labour market regulation imbroglio is actually a part of
Thailand _ 33 479 33 0
Malaysia
the same problem. Instead of creating room for different _
kinds 24 600 28 30
of contracts between workers and employers, the effort
Source: is to
Doing Business (2008), World Bank.

Economic & Political weekly BH3 September 19, 2009 vol xliv no 38 53

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 J__PEdALMTICL^ ? ^-= - -?- -^^1^-=^-=^
have attributed a large part of China's success,
sales. despite
So if the its govern
government's aim is to he
ment's overtly interventionist behaviour
shouldvis-a-vis the to
allow them market, to
do so. And, in any
the fact that it was intelligent intervention.
wishes to Contending with the
buy, such transactions are Pare
same argument Yao (2008) argues that China someone
However, succeededwedded
becauseto both (a
it has had a "disinterested government", meaning
difficulty. If someit has not wants to
politician
played one group against another but
inghas been
their a neutral
property referee.
then, by condition
This is a valid argument. But whatworse
stands out
off ifeven more
people sellis thatproperty.
their
China has had the luck of an intelligent government.
sale between It has
a willing clev
seller and a will
erly held back damaging intrusions into the market.
improvement. They This, how
are better off but
ever, always has the risk of changing. As sale
to the argued, when
is, by an agent
(b), worse off. So condi
is as powerful as China's government is, it
other can easily
words, fallbe
one can prey to
a Paretian and
the temptation of exercising that power in the
ference in interests of itself
the market by the or
governmen
a small group. This can also be not to
a response to one
(a) and (b), temptation but
cannot use the Pareto
self-preservation in times of turmoil.
"any"China's excessively
government pliant
intervention.
civil society could cease to be that under times of stress, for in
Social Conditions
stance, a period of growing unemployment or inflation. Its at
Another
tempt to dislodge those in power can underlying
easily result issue
in a siege is that soci
men
tality on the part of the government, whereby
largely it becomes
determined impos
by history, matter
sible for it not to exercise the vast powers that
are not it already and
quantifiable has. subject to for
variables, one has to use one's comm
4 Notes on Markets and Interventions
rules of action. What worked in China
what
There is an analytical subtext to what did
was well inabove
written Southand
Korea may back
this
last section is meant to elaborate on it. mean
not An important underlying
that one has to suspend all judg
message is the need not to blind oneself with
use one's ideological
intuition rulesto craft p
and "feel"
about how to run an economy. Of course,
not be we have our
reduced normative
to engineering rules. T
preferences. Some may want a highmarket
growthreforms.
society On
andthe face of it Paki
another
all. India's
person may be prepared to compromise most contentious
on growth in order to labour le
have a better distribution. On the normative
makes the layingobjective
off ofdiffer
workers difficu
Act, 1947
ences, there is not much to debate about. It is a- case
became lawvalues
of "my a few months
versus yours". But in translating a given
gainedobjective to what
independence should
from Britain in A
Democratic
be done on the ground, the only criterion India
should made
be that marginal
of sci ame
hasdata
ence. We must use the best available not and
been able
best to make to
reasoning serious ch
develop policy rules. leader, impatient about troublesome
Pakistan
To do otherwise is to fall into regressive (nowtraps
policy Bangladesh)
and con repealed t
tradictions. Let me illustrate this with a contradiction
1960s, had a muchin conserv
more flexible reg
2001). precept
ative, right wing thought. It is a common It is however
of suchnot very clear tha
thinking
that, (a) if a change is Pareto improving,
derive much
there from
must not
this be
change
any of law.
third party intervention to stop it.mined
While by theaware
being law and partly
that there a matter
are exceptions to this rule, I subscribe to Also,
custom. it and believe that
Pakistan's a complem
other
huge amount of harm has been done inadequate; and Pakistan's
by governments economy has
wantonly
over
violating this. Hence, when a rational the years.
buyer and a rational seller
want to transact and there is no obvious externality
Since Bangladesh from
was theout of Pak
formed
transaction, the government should,Pakistan's
typically, laws and it
not stop has
the also not done
trans
action. Another common axiom of and
conservative thought is
on other economic that Clearly, w
fronts.
theutility.
(b) a person's choice reflects his or her law, the experience
If a of Pakistan an
person chooses
x over y, the person must be better benefit
off w ith x over
from suchy. This isisat
change not inevitab
to make concurrent changes in social in
times referred to as consumer sovereignty.
complementary
I have in some of my writings criticised policies,
the government such as a socia
ruling
for workers,
in some parts of India whereby the owner though- Ian
of a property should
apart emphasis
greater
ment, for instance - is not allowed to sell it. flexibility of the
This is usually labour
true of laws is
workerssold
property that the government originally in the organised as well as uno
at below-market
price to relatively less well-off citizens. The law is prompted by the
fear that, if you let such people sell Market-Enabling
their property, thenNorms
soon the
rich will buy up all such apartments Finally
from theletrelatively
me commentworseon social instit
off.
traditional
My argument was simply that, if these economics
less well-off peoplewas
wishwritten
to up as
Take,
sell their property presumably they will for instance,
be better offtrade
with or exchange,
such

54 September 19, 2009 vol xi.iv no 38 GEE2

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economic interaction between human beings. It is a standard as
sumption in economics that, if individuals prefer more to less,
their preferences are convex and the initial endowments are lop
sided, then there will be exchange. But experiments with rats nomic policies right is important for growth, but vastly more im
have shown that even when all these three conditions are satis portant is the need to have the fauna and flora of market-enabling
fied rats do not perform trade and exchange.
Clearly, there are other unwritten requirements which are pre
conditions for trade and exchange. These have to do with social
norms - the ability of agents to communicate with one another,
the ability of individuals to exercise self-restraint and respect
what belongs to others and not try to snatch and take away other
individuals' endowments by force (rats do that). In brief, there is
a set of "market-enabling norms" which need to be in place before
a market-economy can function efficiently (Basu 2000).
This is not a normative observation. Whether or not a norm is
morally desirable is distinct from whether or not a norm has
properties that help markets function efficiently. In India, the
norm of respecting a queue is ill developed. In industrialised na
tions, when people join a queue, they do not give it a thought,
mechanically taking up their place at the end of it. On the other
hand, in India, a gap in a queue is viewed as an opportunity,
Once one begins to think hard about norms, one realises that
there is a raft of them that needs to be in place before an economy
can function effectively and prosper. The role of getting our eco
norms in place. Economies and regions have floundered and
failed more often for not having such norms in place than be
cause of wrong policies.
Minimal amount of trust, some altruism, respect for rules, are
all part of norms that aid markets and development. Chung
(2007: 29, column 2) is right when he stresses the significance of
certain social and institutional preconditions for South Korea to
do even better:
One can easily see that social safety nets that mitigate workers' fear
of restructuring, trust and reputation that facilitate market transac
tions, and the legal systems that support markets are not easily ex
ported to developing countries. The potential role of this invisible
and important part of human interaction should not be underesti
mated. The social capital of trust, an accepted long-term view, and
shared norms that generate a positive environment for everyone are
needed to ensure transparency and to guarantee that market princi
ples work properly.

the opportunity to cut in, in the same way that in a marketised We do not fully understand what all the market-enabling
economy a rise in demand is viewed as an opportunity - the norms are, and how some societies come to acquire them and
opportunity for entrepreneurs to raise prices. It is not that one why others are inadequately endowed with them.19 An important
of these norms is "morally" better than the other but not reason for this lack of knowledge is the economist's prior that
having the queuing norms does hurt the smooth functioning of matters of social norms, institutions and culture are unimportant
the economy. for economic development. Consequently this is a field of inquiry
Another example is the norm not to steal. Consider a special that has not been adequately studied.
case of this - the norm not to steal from the rich. It is not clear To sustain the development process that has started up in so
that this norm always has moral force behind it. Since the wealth many nations, for instance, China, and, more recently, India, and
of the rich is at times ill-gotten, to take away from them is not to jump start the process where there has been stagnancy, for in
"axiomatically" immoral. Yet it can be argued that not having stance, large tracts of sub-Saharan Africa, we must combine good
this norm makes it hard for an economy to function effectively, economic policy with appropriate social and institutional poli
and maintain high levels of investment and growth. Hence, while cies. For the latter we need to step up research in this field, which,
this norm may or may not have moral force, it is a critical market by occupying a space in that no-man's land between the tradi
enabling norm. tional disciplines of academic inquiry, has been all but ignored.

NOTES class interests within China, which can be desta 10 One reason for disagreement on what caused
1 As I have written elsewhere (Basu 2007), many bilising. Greater income equality usually goes to China's growth is the choice of benchmark. If
years ago in Delhi, outside the office for obtaining gether with greater literacy and better health pro we compare the China of the 1990s and even
driving licences, a "doctor" offered me a certifi vision. China made huge strides in these before today to the China of the 1960s or early 1970s,
cate for good eyesight, adding kindly, "irrespec 1978, thereby setting the stage for the surge in there is no doubt that there have been huge
tive of the condition of your eyes". economic growth that would come a little later pro-market reforms. This is catalogued very well
2 This is a somewhat awkward moment to be writ (Sen 1998). in Yao (2008). Yet, my argument is that, if we
5 The figures for 2005-07 are from the IMF World
ing this since, starting with the financial crisis compare the level of control the state continues
and the recession in industrialised nations, aEconomic Outlook database, cited in Burton and to exercise over the economy - from the owner
slowdown has spread across most of Asia. India's Zanello (2007). The figure for 2008 is based on an ship of agricultural land, through movement of
growth rate of GDP (at factor cost) in 2008-09 has estimate from the Ministry of Finance, Govern labour to the ownership of firms - in China with
come down to 6.7% (Government of India 2009). ment of India. For the financial year 2008-09 the certainly market economies but virtually any
However, no matter how this recession works out growth rate is expected to go down to 7.1%. economy, China turns out to be one of the most
6 For recent comparative studies of inequality
(Rakshit 2009), the basis of my analysis here, state-controlled economies in the world. To
which is focused on history and long run trends, in India and China, see Bardhan (2008) and that extent its economic success does not fit com
is unaffected. Chandra (2009). fortably the models encountered in economics
7 See also Prestowitz (2005) and Khanna (2007). textbooks.
3 What is unquestionably true is that China has fol
lowed an open door policy since the late 1970s. 8 In varying degrees, there is novelty in the growth 11 For an excellent analysis of the Maoist roots of the
For an engaging analysis of this that delves into experience of both China and India, as is illustrated supposedly pliant nature of Chinese labour, see
the ideological ambiguity of this policy, see Desh amply in Khanna's new book (Khanna 2007). Riskin (1973).
pande (1998). 9 The baffling nature of contemporary Chinese 12 The president of Peking University, Ma Yinchu,
4 In his insightful analysis of China's recent success, capitalism is marvelously described in a recent was not only silenced but lost his job over this in
Yao (2008) recognises the role of pre-1978 in what book by Huang (2008). The control of some Chi the 1950s.
happened after that. He points to the significance nese corporations are so intertwined between the 13 For an analysis of uprisings through the country's
of a more equitable distribution of income that government and the private that it is impossible early history, see Wong (1997).
was achieved during early communism in China. to unambiguously classify these corporations as 14 Singapore may be an exception to this. It has on
According to him, this also dampened factional or either state-owned or private. occasions has had savings to rival that of China.

Economic & Political weekly GEC3 September 19, 2009 vol xliv no 38 55

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 Interestingly, Singapore is also a case of an economy,
led by the strong arm of government (see Hong
2008), even though in terms of direct state-own
ership of enterprise and corporations, it does not
come anywhere near China.
15 For an analysis of India's reforms and recent
growth performance, see Ahluwalia (2002), Basu
(2004), Rodrik and Subramanian (2004), Srini
vasan (2005), Basu (2006a, 2008) and Panagariya
(2008).
16 Even as I write this, both these indicators -
foreign exchange reserves and the fiscal deficit -
have taken a turn for the worse because of
the global financial crisis. I am however inclined
to treat these downturns as temporary and the
improving trends to resume once the crisis is
over.
17 It is worth mentioning that there is an enormous
amount of inter-regional policy variation in Chi
na. The land-locked hinterlands have tended to be
more state directed, whereas the coastal provinc
es have been more market driven (Nee, Kang and
Opper 2009). However, even the most market
driven areas continue to be more state-controlledClifford, Mark (1994): Troubled Tiger (London: ME
than most other nations in the world.
18 For an analysis of changes in poverty and inequalDeaton, Angus and Jean Dreze (2002): "Poverty and
ity in India, see Deaton and Dreze (2002).
19 There is a small literature in economics on how & Political Weekly, 7 September, Vol 37.
some norms can be nurtured or mitigated through Deshpande, Ashwini (1998): "Continuing the Open
appropriate interventions. Aldashev, Chaara,
Platteau and Wahhaj (2009) provide interesting
theoretical constructions of how the law can be Dollar, David and Shang-Jin Wei (2007): "Das (Wasted)
instrumental in influencing norms.
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